2016 Starts with a Whimper

Economic data proved so weak at the beginning of 2016 that global markets fell and China halted stock trading. In China, the Caixin Purchasing Managers Index (PMI), released by Markit Economics, fell to 48.2 in December, down from 48.6 and indicating the tenth month in a row of a contraction in activity.

"Data suggested that client demand was weak both at home and abroad, with new export business falling for the first time in three months in December,” said Markit in a public statement, noting that the weakness in purchases extends beyond China’s shores and may indicate a weakness in the global economy as a whole.

The news spooked equity markets globally, causing the Dow Jones Index to lose over 300 points, or nearly 2 percent, in pre-market trading and face similar losses as trading began. The S&P 500 fell 1.7 percent, while the small cap Russell 2000 index noted a 1.66 percent drop at the same time.

Many analysts fear the weakness in the PMI could have a deep and far-reaching impact on the domestic Chinese market, causing layoffs, lowered demand, liquidity constraints, and other indicators, that China’s growth, which has slowed for years and has reached a very weak point in recent months, will slow even further. "As a result [of the low reading], manufacturers continued to trim their staff numbers and reduce their purchasing activity in line with lower production requirements,” Markit said in a statement.

Global Contagion

While U.S. markets fell, they were extremely strong relative to the steep declines throughout the world. In London, the FTSI 100 fell over 2.5 percent by mid-day trading, while the Paris CAC 40 fell 3.7 percent and the Euro Stoxx 50, which measures the largest stocks in the European area, fell 4.2 percent in early trading.

Asian markets received the hardest hits, with the Nikkei 225 falling over 3 percent and the Hang Seng falling 2.7 percent. Relatively stronger was the Seoul KOSPI, down just 2.17 percent, but the hardest hit by far was the Chinese market in Shanghai, with over a 6 percent drop in value before the government intervened and halted trading. While stocks recovered slightly after stocks resumed trading, the Shanghai Composite Index was still down nearly 6 percent by the end of Monday’s trading.

Future Fears

With negative earnings growth in America, weakening demand in Asia, and fears of rising interest rates making debt untenable, particularly in U.S. dollar denominated issues have all contributed to a weak stock market in 2015. Analysts worry that 2016 may have a similar or even worse performance, as global growth remains weak and little remains to catalyze future growth.

Two large investment banks released notes to clients warning of under-performance in equities and high-yield corporate bonds, also known as junk bonds. At the same time, analysts worry that few safe alternatives remain available in the market, predicting a year of relative weak performance across asset classes as economic growth proves unobtainable.

Professor at Columbia University. Recipient of the Nobel Memorial Prize in Economic Sciences in 2001 & the John Bates Clark Medal in 1979. Author of "Freefall: America, Free Markets", "The Sinking of the World Economy", "Globalisation and its Discontents" & "Making Globalisation Work".

Dr Steinbock is an internationally recognized expert of the multipolar world. He focuses on international business, international relations, investment and risk among all major advanced economies and large emerging economies. In addition to advisory activities (www.differencegroup.net), he is affiliated with India China and America Institute (USA), Shanghai Institutes for International Studies (China) and EU Center (Singapore). For more, please see http://www.differencegroup.net/. Research Director of International Business at India China and America Institute (USA) and Visiting Fellow at Shanghai Institutes for International Studies (China) and the EU Center (Singapore).

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